Electricity generation income cap

08/11/23

This article was last updated on 8 February 2024

Electricity producers have an effective income cap during the period from 1 December 2022 to 30 June 2023. Above this cap, so-called market income is taxed at a rate of 90 per cent. The ceiling is calculated on a monthly basis (average price) and depends on the mode of electricity generation. The general income cap is 130 euros per MWh. Installations from 1 megawatt (MW) upwards are taxable, thus the bill affects an estimated 1,500 installations.

For the Netherlands, this includes electricity generated in the Netherlands and in the Dutch exclusive economic zone from wind, solar, hydropower, biomass, biogas, waste and nuclear energy.

The run-up to this levy is remarkable. On 6 October 2022 this measure was adopted by the EU as part of the energy emergency measures, on 30 November 2022 the cabinet outlined how the income cap would be implemented in the Netherlands, and it was not until 21 October 2023 that the bill was submitted. Ultimately well after the levy period had expired. Therefore, also based on a subsequent amendment to the bill, taxable persons will be given extra time to submit the market revenue report, file the declaration and pay the levy due. The return must now be filed by 31 March 2025. In addition, tax interest (7.5 per cent in 2024) will only be charged if after 1 April 2025, it is established that too little tax has been levied as a result of a newly prepared market income report - at the request of the Tax Administration - or if the additional tax assessment has been imposed ex officio.

The legislative proposal implements a component of the European energy emergency measures. In response to Parliamentary questions, the Minister confirmed that the European Commission has evaluated the inframarginal electricity charge and has not extended it. It would therefore remain a one-off levy.

What does this mean for your organisation?

The income cap will apply to electricity generated from wind, solar, hydro, biogas, waste and nuclear power, among others. All income exceeding the ceiling of 130 euros/MWh on a monthly basis will be taxed at a rate of 90%. For gaseous biomass, a rate of 285 euros/MWh applies, for solid biomass a rate of 240 euros/MWh applies and for coal, the income cap will move with costs.

By sticking to monthly price averages, the aim is to be in line with accounting - common in practice - based on monthly reports. It is also intended to prevent plants from being deliberately temporarily shut down if the income cap would be in line with hourly values.

The income cap applies for the period 1 December 2022 to 30 June 2023. Although the underlying EU regulation allows for the possibility of extending the income cap beyond 1 July 2023, this has not been decided at EU level and the minister indicates in the explanatory memorandum to the legislative proposal that an extension of the inframarginal electricity levy is not foreseen.

Electricity from biomass fuels

As indicated above, the income cap for electricity from biomass fuels will be higher, at 285 euros/MWh for gaseous biomass and 240 euros/MWh for solid biomass. The reason is mainly the sharp increase in costs for biomass.

The 240 euros/MWh for solid biomass fuels is based on the estimated price for woody biomass at the end of November 2022. The 285 euros/MWh for gaseous biomass fuels is more in line with the exempted amount applied to gaseous biomass in Germany and Belgium and German research on this sector.

Electricity from coal

Coal-fired electricity generation is in principle also subject to an income cap of 130 euros/MWh, unless the marginal cost of coal-fired generation (consisting of coal and CO2) is higher. In that case, the income cap moves with it. This assumes a fixed amount of 40 euros/MWh on top of the costs for coal and CO2, leaving generators with a reasonable gross margin.

The reason for introducing a flexible ceiling for coal-fired generation is that on 20 June 2022, the government withdrew the production limitation for coal-fired power plants in order to reduce gas consumption for electricity generation. By introducing the flexible cap, coal-fired plants should be prevented from scaling back production, effectively nullifying this measure.

Adjustments following internet consultation

An earlier draft legislative proposal was in consultation from 27 January to 16 February 2023. See also our Tax News article 'Electricity generation income capped at 130 Euro per MWh’.

As a result of the (many) responses to it, the following aspects, among others, have been adjusted:

Market income per month may be determined on the basis of hourly day-ahead prices. This has been added as a standard method.
The application of the 1 MW limit for generation plants has been clarified, and for solar panel capacity it is more closely aligned with the regulation by looking at the power that can be fed into the grid. For the 1 MW limit, only the capacity of the installation is considered and it does not matter if, for example, a part is produced for own use. Suppose a 1.5 MW installation only feeds 0.5 MW into the grid and uses the rest for its own use, it falls under the levy.
Reporting agents will get an extra three months for submitting the market revenue report, filing the declaration and paying the levy due. For this, they will get nine instead of six months after the end of the calendar year in which the levy period ended, until 30 September 2024.

Regarding the way in which balancing activities on behalf of the grid are treated, it was decided to stick to the distinction already made in the internet consultation.

Significant, incidentally, is the adjustment of the expected revenues of this tax. Whereas tax revenues were estimated at 1.8 billion euros at the end of November 2022, this has now been adjusted to 100 to 200 million euros. The reason, of course, is the much lower electricity prices.

Adjustments from the parliamentary process

The preparatory work in the House of Representatives for the Temporary Inframarginal Electricity Levy Act has been completed and the bill has been submitted to the plenary chamber to be passed as a hammer piece. In the process, a number of further sections were adjusted and questions answered. The following items have been amended in the bill:

the deadline for submitting the market income report, filing a tax return and paying (remitting) on return will be 1 April 2025;
tax interest (7.5 per cent as of 2024) will only be charged for additional tax assessments and will then be calculated (singularly) for the period from 1 April 2025 up to and including 14 weeks after the new market income report has been submitted or the additional tax assessment has become final (6 weeks after the signing date);
the market income report must also include the tax number of the producer and, in the case of a producer without legal personality, the tax numbers of the participants.

Answers confirmed that the European Commission evaluated the inframarginal electricity levy and did not prolong it. It was also indicated that energy cooperatives can be exempted from the levy, the regulation does not allow for this.

What is meant by income?

The cap explicitly refers to income and not profits, this excludes costs. In addition, the underlying EU regulation states that the cap may only apply to realised market income. This means that, for example, hedges against fluctuations in the wholesale electricity market are excluded. Also, costs that depend on the electricity price cannot be deducted from market revenues.

For determining the average market income per MWh, it has been clarified that production income from non-inframarginal sources may in principle be disregarded, e.g. revenue from batteries and purchase and sale for the benefit of retail. This is different in case of bundled sales. In that case, market revenue will have to be allocated to electricity subject to the inframarginal electricity charge or to a separate exempt amount (ceiling).

Partnerships

If electricity is generated in an organisational unit that is not a legal entity, such as a general partnership (vof) or a limited partnership (cv), the underlying participants are considered the producers. As a result, the participants are therefore the taxpayers for this levy and that is for the part of the production or the part of the result of the production that accrues to them.

The reason is that the producer generating electricity must always be a natural or legal person. Therefore, in the case of the organisational unit like a vof or cv, the natural persons or legal entities generating the electricity in or through the organisational unit are looked over.

Exceptions

Production installations with a certain SDE decision

For production installations subject to the levy and for which an SDE decision has been issued with a phase, base or tender amount higher than 130 euro/MWh, that higher price will apply as an income cap. Only if the market income from this plant per month exceeds the phase, base or tender amount, tax will have to be paid.

This is intended to safeguard the investment climate for renewable electricity production, without the need for adjustments to the SDE++ or a new subsidy instrument. There are around 100 production plants in the Netherlands that have received such a decision with a base amount higher than 130 euro/MWh.

Revenues from compensation for redispatching and compensation trading excluded

Market revenues from redispatching compensation and compensation trading are not covered by the levy. As the exempt amount is expressed in euros/MWh, both the revenue in euros and the volume of electricity produced in MWh must be adjusted for balancing energy or redispatching and compensation trading.

Method of taxation above income cap

The method of taxation is payment on declaration, just as for VAT returns for example. Producers must therefore calculate, declare and then remit the tax due themselves. The levy must be paid once, within nine months of the end of the calendar year, for all seven months in which the ceiling is in force, to the extent that the ceiling has been exceeded on a monthly basis.

In most cases, market revenue can be determined on the basis of day-ahead prices. For producers for whom this does not apply, market revenue can be determined on the basis of the so-called accounting method. This method allows a generator's market revenue from electricity production to be based on those parts of the generator's records that relate to market revenue from production. If a generator uses this, the market revenue report will have to be accompanied by an auditor's verification. The auditor protocol required for this purpose is still being drafted.

Background

The basis for the price cap is contained in the agreement of European energy ministers on the package of emergency measures to deal with high energy prices of 6 October 2022 and further shaped in the Regulation (EU) 2022/1854 on emergency intervention in response to high energy prices (the EU Regulation). Based on the EU Regulation, all revenues from 'inframarginal' electricity production (including nuclear, lignite and renewables) above 180 euro/Mwh must be collected by member states and passed on to energy consumers to alleviate the impact of high energy prices. For more background, see 'European Commission intervenes to address high energy prices'.

Dutch interpretation of income cap

With 130 euros/MWh, the Netherlands has opted for a lower income cap than 180 euros/MWh because the Dutch interpretation uses the market income based on monthly averages and includes prices during off-peak hours, while the EU regulation is based on prices during peak hours.